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BoC expected to hold interest rates this week as grey cloud hangs over economy



The Bank of Canada is poised to maintain its current interest rates amidst a backdrop of economic uncertainty, with experts predicting a cautious approach in the face of potential challenges. Analysts anticipate that the central bank will keep its key interest rate steady at five percent during the upcoming announcement, delaying any rate cuts until around June.


Economic indicators have been painting a complex picture for Canada's economic health. The recent Gross Domestic Product (GDP) figures will be a focal point for the Bank of Canada, as it assesses the impact on the trajectory of interest rates. Despite meeting expectations, the GDP slowdown in the Canadian economy aligns with the central bank's projections, though some experts suggest a slightly weaker outlook than initially envisioned.


Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, notes that domestic spending took a hit in the fourth quarter, particularly concerning given the significant population growth during that period. The annualized one percent growth in the fourth quarter exceeded forecasts but belies the underlying weakness. Global factors, such as robust U.S. spending trends benefiting Canadian exports, played a pivotal role in driving economic growth. However, per-capita real GDP continued to decline, leading experts to characterize this growth rate as notably weak.


Douglas Porter, BMO's Chief Economist, remarks that the Bank of Canada's aggressive rate hikes have contributed to the economic slowdown. Higher borrowing costs on mortgages and other debts have prompted consumers to cut back on spending, while businesses are experiencing a decline in investment.


An exception to the economic downturn is the labor market, which, according to Statistics Canada's labor force survey, showed a decrease in the unemployment rate to 5.7 percent in January, remaining close to pre-pandemic levels. However, Mendes expresses skepticism about the survey's accuracy, pointing to payroll data suggesting a more substantial weakening of labor market conditions.


The softening Canadian economy, coupled with improvements in supply chains, has contributed to a deceleration in price growth. The annual inflation rate dropped to 2.9 percent in January, falling back within the Bank of Canada's target range of one to three percent. Despite this, the central bank remains cautious, emphasizing the need for sustained inflation below two percent.


Mendes emphasizes the importance of the central bank's stance on core inflation measures, which exclude volatile price movements. While the Bank of Canada notes that its core measures remain above the target, Mendes questions their reliability, suggesting they may omit critical components necessary for an accurate inflation assessment. He anticipates the Bank taking a more comprehensive approach to inflation indicators and acknowledging progress in curbing underlying inflationary pressures.


As the Bank of Canada faces the challenging task of navigating economic headwinds, the upcoming interest rate announcement will likely be a crucial moment for signaling the central bank's outlook on the country's economic future.


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